Risks To Shareholder Returns Are Elevated At These Prices For Samsung SDS Co., Ltd. (KRX:018260)

With a median price-to-earnings (or "P/E") ratio of close to 15x in Korea, you could be forgiven for feeling indifferent about Samsung SDS Co., Ltd.'s (KRX:018260) P/E ratio of 16.8x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Samsung SDS certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Samsung SDS

Want the full picture on analyst estimates for the company? Then our free report on Samsung SDS will help you uncover what's on the horizon.

How Is Samsung SDS' Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Samsung SDS' to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 6.5% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 1.2% overall drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 7.4% per year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 18% per year growth forecast for the broader market.

In light of this, it's curious that Samsung SDS' P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Bottom Line On Samsung SDS' P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Samsung SDS currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Samsung SDS with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Samsung SDS. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.